Increasing pension contributions

Marcon

Yazmina said:

Right.  So the advice that small increases to my contributions now will make all the difference later, is useless?

The advice isn't useless, but if you are only going to make a small increase now it isn't going to make a vast difference later given that you are already 47. If you were 20 years younger, it would make a much bigger difference because the funds would have so much longer to grow.

One thought which might help - you say your payslip shows you are making contributions of 5.45% of pay. Have you asked your employer if they give the option to pay by salary sacrifice, which would give you an NI saving? You could then pay an amount equivalent to that saving into your pension without even noticing...

ewaste

It's a nudge for people to save more, if an additional 2% doesn't seem like it's going to make much of a difference what expectations do you have for the 5.45%. What is your employers contribution rate?

5.45% is only just above the Auto-enrolment minimum of 5%, that's essentially set at a level so that someone retiring at State Pension Age wouldn't be entitled to any further state support. It's not going to afford anyone more than a basic retirement which many people will be quite happy with. Although if the employee increases their contribution rate a little bit at a time it'll improve their especially if they've multiple decades until retirement. 

I personally make Additional Voluntary Contributions of around 10% of Gross Pay to the scheme I'm a member of. That's in addition to the basic ~15% EE&ER contribution made on pensionable pay. 

QrizB

Yazmina said:

I put a 2% increase into an online calculator and it said I would get an increase of £251pa in retirement.

Which online calculator? Because that doesn't seem a likely result.

Yazmina said:

An increase of £82 per month.  (The current monthly deduction is £218.  This would put it up to £300).

£82 a month for 20 years totals £19680. It's pretty much inconceiveable that an extra £20k will only buy you £250pa when you retire.
Currently it would buy you £1100pa.

Yazmina said:

Right.  So the advice that small increases to my contributions now will make all the difference later, is useless?

£82 pm is 2% of £50k pa. You can save for retirement, or you can live on state pension of £10k pa once you get there. The choice is entirely yours.

dunstonh

Yazmina said:

Right.  So the advice that small increases to my contributions now will make all the difference later, is useless?

If you didnt put it in the pension, what would you do with it?
Pension will be savings accounts and ISAs.    So, it would be better than those.

Plus, as QrizB says above, you need to understand the assumptions used by the calculator.    They could be pessimistic on the growth figures.  They are probably factoring inflation into it and showing a today's terms figures rather than the future terms.

Yazmina

Right, so the options are find a better calculator and consider NI/AVCs. That's helpful.  Thanks.

LHW99

Yazmina said:

Right, so the options are find a better calculator and consider NI/AVCs. That's helpful.  Thanks.

IMo forget the calculator and increase the contributions.

GazzaBloom

One great way to increase your retirement wealth is to pay off all debt and any mortgage, a guaranteed immediate return in investment in the interest you save.

Once that's done ramp the pension contributions, especially if a higher rate tax payer and using salary sacrifice and let compound interest do it's thing on the snow ball as it gathers size.

Albermarle

LHW99 said:

Also, with some workplaces, if you make a larger contribution your employer will too (not all). The calculator won't likely include that.

OP,
Check the above.
Clearly if you add 2% extra then your employer adds an extra 2% then double good ( although many employers will not)

Although some of the figures you saw were unduly pessimistic ( as explained by previous posters) the harsh truth is that to have a good income in retirement, you have to build up a BIG pot, because it has to potentially last many years hopefully.
So whilst an extra 2% can only help, it will only help a bit. 

Some other possible solutions are :
Get a better paid job so you can afford to add more.
Get a job where the employer is more generous with their contributions.
Get a job in the Public Sector where the pensions are much better.

jamesd

GazzaBloom said:

One great way to increase your retirement wealth is to pay off all debt and any mortgage, a guaranteed immediate return in investment in the interest you save.

Once that's done ramp the pension contributions, especially if a higher rate tax payer and using salary sacrifice and let compound interest do it's thing on the snow ball as it gathers size.

It's great but for many a great way to make yourself poorer than you could be.

A more efficient way is to make pension contributions then use the tax free lump sum to do mortgage repaying. This gets you tax relief on your mortgage capital overpayments.

Since pensions can only be accessed from 55 rising to 57 and because the maximum pension tax free lump sum is a little over a quarter of a million this can limit who can usefully do it, with mortgage overpaying usually better at young ages.

mcc100

GazzaBloom said:

One great way to increase your retirement wealth is to pay off all debt and any mortgage, a guaranteed immediate return in investment in the interest you save.

Once that's done ramp the pension contributions, especially if a higher rate tax payer and using salary sacrifice and let compound interest do it's thing on the snow ball as it gathers size.

This is the route that I took after my company closed their final salary scheme five years ago.

Taking advantage of a high CETV, I transferred my DB pension to a SIPP and used part of the TFLS to pay off my mortgage, which has allowed me to salary sacrifice the maximum amount allowed into my new workplace pension for the last four years.

When I retire later this year at the age of 60, the workplace pension will fund the seven years until I receive my state pension without having to withdraw from my SIPP.